Differences and Pros and Cons between a California LLC v. a California Corporation

A corporation or a Limited Liability Company (“LLC”) are usually formed to limit the liabilities on an individual basis. An LLC is generally seen as a less complex version of an entity. It is said so because an LLC offers almost similar liability protections to the owners or shareholders as a corporation, but it is much easier to form than the corporations. There are various advantages and disadvantages between an LLC and a corporation. You should be aware of them and keep them in consideration before opting for an LLC or a corporation in San Diego, California. In this article, we will help you with that and explain the key differences and pros and cons between both these entities on various grounds.

Liability

The liability factor is the most important one for the formation of LLCs and corporations in San Diego. A corporation is a legal entity that is separate from its shareholders. These corporations act as risk insulating entities that protect their shareholders from personal liability in case there are debts, and these debts are merely treated as the debts of the corporation and not the individual. In California, similar to a corporation an LLC also protects its shareholders from personal liability that arises due to the debt incurred from the LLC’s functions or during the existence of the LLC.

However, you must keep in mind that you may not protected from being held liable if there are criminal proceedings involved. A court could use the process known as “piercing the corporate veil” to hold an owner or the shareholders liable. It is done only in limited cases where there is a proof of criminal activities like fraud. After “piercing the veil” to courts can hold you personally liable for the debt owed to creditors.

Structure

A corporation has a complex management structure which is usually three-tiered and includes the shareholders, the board of directors, and the officers. The board of directors in a corporation are generally tasked with dealing with the management decisions, while the officers look at the everyday functioning of the corporation. A corporation is also required to have meetings regularly, and to record the minutes of these meetings. Meanwhile, in an LLC there are no such requirements of regular meetings or minutes. A California LLC offers flexibility and there need not be any officers to manage an LLC apart from a managing member. An LLC is formed after the execution of an operating agreement. This operating agreement establishes the rights and duties of each member of the LLC. Thus, the capital distributions and rights for each member can be custom-made for each member and included in the operating agreement.

The number of persons that can hold shares in a corporation is unlimited. On a similar note, the number of members an LLC can include is unlimited.

While the structure of a corporation is quite complicated and can be difficult to manage and execute in a right way it certainly helps in raising funds. Investors are usually more willing to invest in a corporation as they have a good structure. On the same note these investors find LLC riskier due to its structure.

Taxes

The taxing rates and methods are very different for a corporation and LLC in San Diego, California. A corporation is taxed at the current corporate tax rates at the state and federal level. Currently, the tax rate for corporations at the federal level is 21% and the state tax charged by the state of California is 8.84%.

On the other hand, an LLC does not get taxed directly. The earnings received by an LLC is shared with each member as per the operating agreement. On the basis of this income received by each member they are taxed personally as self-employed income. The taxes include self-employment tax, social security, and taxes for Medicare.

Before reaching a conclusion, you should consult a San Diego Business lawyer for further details regarding a California corporation and LLC. You can also refer to San Diego Business Law resources provided by the California Secretary of State.